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Dealers can't even touch some hot brands

Dealer David Slone owns the largest auto dealership group based in Arkansas, yet he has been stymied in his efforts to buy a German luxury brand dealership -- anywhere.

Slone, 52, has spent three years looking for a BMW, Mercedes-Benz, Audi or Porsche store to buy. He has made four offers in the last two years, only to lose each time.

"You're naturally disappointed, but you begin to realize where the marketplace is, and you have to be patient," said Slone, owner of Superior Automotive Group, of Fayetteville, Ark. "You can overpay to some degree, but you can't overpay so much that you don't get a return on your investment."

Slone faces the same challenges as others looking for those franchises. There are a limited number of those brands' stores for sale, and the available ones command a premium price tag. His story illustrates the dynamics of today's buy-sell market.

Slone: Luxury stores worth it

The chase

"It's like you're chasing a stock you really want to own, and it keeps going higher and higher," said a frustrated Slone.

But succeeding will be worth it, he said. Slone already owns a BMW dealership and a Mercedes-Benz dealership among his 15 stores, all in Arkansas.

Those two stores offer higher net profits, and their fixed operations cover more of the operating costs than any of his other brands do, he said.

Slone, a graduate of the University of Arkansas with a Bachelor of Arts in finance and accounting, worked for a bank in the mid-1980s.

He got into the car business in 1987 when he bought into a dealership owned by one of his loan customers.

Over the last two years, Slone has made an offer on a Mercedes-Benz store in Reno, Nev.; a BMW and Mercedes-Benz dealership in Fort Walton Beach, Fla.; a Mercedes-Benz store in Charleston, W.Va.; and a Mercedes-Benz store in Louisiana.

The first three sold to buyers with higher offers, Slone said; the Louisiana store has not sold yet.

The buyers include a public dealership group, a private group with private-equity money and a privately held dealership group with growth ambitions similar to his, he said.

"The competition is fierce," said Slone. "Any edge you have in German luxury is by providing tremendous customer experience in the stores you already have and showing that your retail sales are effective because whoever the buyer is has to be approved by the manufacturer."

Red-hot blue sky

Slone faces the busiest dealership buy-sell market in decades. And German luxury brands are red hot. The competition for them is driving prices upward, buy-sell advisers say.

Typical blue-sky multiples for Mercedes-Benz, BMW and Porsche dealerships are 7 to 10 times adjusted pretax profit, according to the Year End 2014 Haig Report released last month. Blue-sky multiples for Audi are 7 to 9 times, it said.

Blue sky is the intangible value of a dealership, expressed as a multiple of adjusted pretax profit. Estimated multiples -- which can vary enormously based on a dealership's location and other factors -- are based on actual adjusted earnings by normally performing stores.

"I have never seen prices this high for dealerships before, and there's a particular spike on the German luxury" brands, Alan Haig said when he issued the report. Haig is president of Haig Partners, a dealership buy-sell advisory firm in Fort Lauderdale, Fla.

Many sellers know they are sitting on gold mines. They can dictate the deals and often find ways to justify commanding top dollar, Slone said.

"The sellers are very creative as to what the definition of annualized income is. Whether that's trailing 12 months, the physical year or the last physical three years, they find ways to create a much higher number," Slone said.

Many sellers are also "very liberal" in their accounting methods to determine the store's profits, he said. That's because the higher the store's profit, the higher the selling price.

Slone said one seller told him, "We were overstaffed in our sales." That seller then tallied the compensation to the "excess" sales staff, subtracted it from the store's costs and thereby boosted the store's supposed profit for valuation purposes. "They get away with it because there are more buyers than there are sellers," Slone said.

Grow or die

Indeed, buy-sell adviser Mark Johnson said that for every German luxury brand store for sale, there are usually 50 buyers vying for it.

Johnson, president of MD Johnson Inc., in Seattle, said his clients who own stores with those brands get "one to two calls per week from a broker or a dealer wanting to know if they're selling."

The aggressive pursuit is due to a low supply of German luxury brand stores.

BMW has 339 franchises in the U.S. Mercedes-Benz has 366, Audi has 283 and Porsche has 189, according to the Automotive News Data Center. In contrast, Toyota, another in-demand dealership brand, has 1,236 franchises.

Johnson said that at any given time, only about 3 percent of German luxury franchise dealers are even considering a succession plan that "could include" a sale.

Still, Slone remains undeterred.

"We view it not as a sprint but as a marathon," he said. "We're in this business to stay regardless of where prices go. We buy into the philosophy of: If you're not growing, you die."